Corporate Law Update
- The Investment Association publishes new guidelines for listed companies when redeeming or cancelling irredeemable preference shares
- The Investment Association also intends to publicly flag companies with poor diversity and excessive executive pension contributions
- The Government sets out the key implications of a no-deal Brexit for accounting and corporate reporting
- The court finds that a lease was not brought to an end because of Brexit
- A few other items of interest
The Investment Association (IA) has published new guidelines for listed companies (or issuers) that are looking to redeem or cancel their own “irredeemable preference shares”.
Irredeemable preference shares (also called “perpetual preference shares”) are not necessarily irredeemable in the true sense. An issuer may be able to redeem perpetual preference shares if those shares were originally issued as redeemable and the issuer’s articles allow redemption. Alternatively, an issuer may be able to buy its redeemable shares back on the market and cancel them or carry out a capital reduction.
Rather, irredeemable preference shares are so called because, unlike most “regular” listed preference shares, they have no fixed redemption or “maturity” date. This means that, unless the issuer takes active steps to redeem them, they will exist indefinitely, much like regular equity.
The new IA guidelines state the following:
- Issuers should follow a fair process and have regard to a fair market price when redeeming or cancelling irredeemable preference shares.
- Issuers should consult with irredeemable preference shareholders to ensure those shareholders have enough time and information to allow them to make an informed decision on any proposed redemption or cancellation.
- This consultation should then inform the issuer’s decision as to the fair market price of the irredeemable preference shares.
- When following any process, issuers should consider the position of their ordinary shareholders and involve them in the consultation.
Ahead of the 2019 AGM season, the Investment Association (the IA) has announced that it intends to highlight companies which are not complying with expected targets in relation to board diversity or executive pension contributions. It will do so by issuing “red tops” (its highest level of warning) and “amber tops” through its Institutional Voting Information Service (IVIS).
On executive pensions, IVIS will red-top a company if it proposes a new remuneration policy that does not explicitly set any new executive director’s pension contributions in line with the majority of the workforce, or if it appoints an executive director on or after 1 March 2019 whose pension contribution is above the level of the majority of the workforce. It will also amber-top a company if any of its existing executive directors receives a pension contribution of 25% of salary or more.
On diversity, IVIS will amber-top a company if less than 25% of its board are women. However, it will red-top a FTSE 350 company if it has only one woman, or no women, on its board (unless it meets the Hampton-Alexander Review target of 33% of women on the board by 2020).
The Government has published a joint letter with the Financial Reporting Council (FRC) setting out the key implications of the UK leaving the European Union (EU) without a withdrawal agreement (a so-called “no-deal Brexit”) for accounting and corporate reporting.
The letter confirms the following changes, which will be made through a series of statutory instruments:
- UK companies that prepare their accounts using EU-endorsed International Accounting Standards (IAS) will continue to be able to do so for financial years that “straddle” the date on which the UK leaves the EU – the so-called “exit day” (currently scheduled for 11:00 p.m. on 29 March 2019).
However, for financial years beginning after exit day, UK companies currently preparing their accounts using IAS will need to switch to UK-endorsed IAS. These are standards that are to be officially adopted by a new UK endorsement body in due course.
UK companies will not be able to switch from IAS to UK generally accepted accounting principles (UK GAAP) merely because of the UK leaving the EU. However, a company will continue to be able to switch to UK GAAP in certain circumstances, including if it has been preparing accounts under IAS for at least five years.
- Similarly, UK companies with securities admitted to a UK regulated market (such as the LSE Main Market) will continue to be able to prepare financial statements using EU IAS for accounting periods that straddle exit day. However, after exit day, they will need to switch to UK IAS.
- Conversely, UK companies with securities admitted to an EU regulated market may find that they need to start preparing both accounts under UK IAS or UK GAAP and accounts under EU IAS.
- EEA companies with a UK listing, however, will continue to be able to prepare their financial statements using EU IAS, as the UK Government is intending to issue an “equivalence decision” recognising EU IAS as sufficient for these purposes.
- UK companies with subsidiaries or branches in a European Economic Area (EEA) state will need to check local requirements. UK GAAP will no longer be deemed automatically equivalent under EU law, meaning that EEA subsidiaries and branches may need to prepare separate accounts under local accounting rules.
- As we have mentioned in previous updates, intermediate UK parent companies with an immediate EEA parent company will no longer be automatically exempt from preparing accounts, and dormant UK subsidiaries with EEA parents will need to start preparing individual accounts.
The Government has also published a separate letter with the FRC setting out the implications of a no-deal Brexit on company audits.
The High Court has found that a lease was not brought to an end due to Brexit. Although the case related to a lease, it is a useful indicator of how Brexit may affect commercial contracts generally.
Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency concerned the European Medicines Agency (EMA), which is currently headquartered in London. The EMA’s lease expires in 2039 and does not contain a break clause allowing the EMA to leave the office premises before then.
European Union (EU) law requires the EMA to be headquartered in an EU Member State. This means the EMA will need to relocate to another EU Member State when the UK leaves the EU. To this end, the EU has legislated to relocate the EMA’s headquarters (HQ) to Amsterdam by 16 November 2019.
In 2017, the EMA notified its landlord that, when the UK leaves the EU, it will consider its lease “frustrated”. Under the English law concept of frustration, a person can treat a contract as coming to an end if, due to some unforeseeable event, it becomes impossible to fulfil the contract, or that person’s obligations are transformed into something radically different from what was originally anticipated.
The EMA argued that the combination of Brexit and EU law meant that it was no longer permitted to lease and pay rent for an HQ in the UK. For this reason, it said, it would no longer be able to perform its obligations under the lease. It also argued that the common purpose of the lease had been to provide an HQ for EMA, and that this purpose would be frustrated by Brexit.
If the lease were to be frustrated, the EMA would be able to walk away from its London premises and stop paying rent.
What did the court say?
The court found that Brexit would not frustrate the lease. In particular, it said the following:
- Although the EMA could no longer be headquartered in the UK, it was still allowed to lease, dispose of and sub-let property in countries outside the EU. Brexit might prevent the EMA from having its HQ in the UK, but it did not prevent it from leasing an office in London.
- The common purpose of the parties was never to provide the London office as the EMA’s permanent HQ. This was particularly the case, given the lease did not allow the EMA to break if it had to move its HQ.
- When the parties entered into their agreement for lease in 2011, Brexit was not foreseeable. However, the EMA had entered into a long-term contract with no ability to terminate when it was foreseeable that some event outside the EMA’s control could require it to leave the UK.
- The lease allowed the EMA to sub-let or assign the office space, which effectively gave it a remedy if it had to relocate from the UK.
It is always important not to generalise too much from cases involving frustration. They are usually very fact-specific and depend to a large extent on the individual motivations of the parties.
However, some of the comments in this case may be useful to businesses considering the effect of Brexit on their longer-term commercial contracts.
In particular, the court noted that, although Brexit was foreseeable as a “theoretical possibility” in 2011, for all relevant purposes it was not foreseeable. There had been turbulent moments between the UK and the EU in the years leading to 2011, and political parties such as UKIP had been gaining traction. However, the terms of debate concentrated on the UK’s continued membership of the EU, not its withdrawal.
This is important. If the courts follow this approach in other cases, it means that Brexit will, in principle, be capable of leading to a contract being frustrated.
But this does not mean contract parties are simply free to walk away from their agreements and cite Brexit as the reason:
- First, the party must show that Brexit was not foreseeable when the contract was entered into.
In this case, the court said that Brexit was not foreseeable in 2011. But it is not clear when Brexit did become foreseeable. Could this be sometime in the morning of 24 June 2016, when the result of the EU referendum became clear? Or could it be earlier – say 27 May 2015, when the legislation for the referendum was first announced, or even 22 January 2013, when then-Prime Minister David Cameron announced that, if the Conservatives won the next General Election, they would hold a referendum on EU membership?
In reality, it’s unlikely the courts will fix a single date, but the later in time a contract is entered into, the less likely it is that a party will be able to abandon it on basis of Brexit.
- Even if the parties to a contract did not foresee Brexit when they entered into the contract, Brexit must still render the contract impossible or radically change a party’s obligations.
This may be difficult to demonstrate. The mere fact that a contract becomes more difficult or costly to perform following Brexit does not mean it will be frustrated. For example, a distributor might find that the cost of obtaining or supplying those goods rises substantially – perhaps even prohibitively – following Brexit, but this alone will not allow the distributor to walk away.
- Merger control. The Competition and Markets Authority (CMA) has published its recommendations to the Government for reforms to the UK’s merger control laws to maintain confidence in public markets. Among other things, the CMA is recommending making notification of mergers above a certain threshold mandatory. Notifying mergers below that threshold would remain voluntary, as is currently the case for all mergers within the CMA’s jurisdiction.
- Climate change reporting. The European Commission has published a consultation on proposed changes to its non-binding guidelines on reporting on climate-related information. The guidelines are designed to assist large public interest entities (PIEs) with making disclosures.